While Scott said he was unsure of the exact timing, when inflation did strike it was likely to happen quite quickly, so he and Lockyer are taking pre-emptive action to protect investors.

Scott told Citywire: ‘It’s a bit like Noah’s ark. You have to build your position before it happens. QE is a serious risk and it is hard not to see inflation further out.’

While not owning gilts last year hurt short-term numbers on the Citywire Selection Watchlist fund, Scott conceded that his inflation-linked bond exposure may also cause short-term underperformance in the next few months, but ultimately the stance would be justified.

‘It may hurt numbers for a little while but this is a cautious fund and we think it is wise to be prudent.’

Scott said the launch of the duo’s income-focused Hawksmoor Distribution fund earlier this year had led them to become more cautious overall on the Vanbrugh fund over the past few months. The Distribution fund, which is yielding around 4.2%, sits in the Apcims Balanced Managed sector and is run as a slightly more adventurous mandate. phoenix hawks

The Vanbrugh fund has around 25% in equity income with the emphasis on global income, and key stakes in Prusik Asian Equity Income and Veritas Global Income.

Adding to European equities

The managers have just added Alice Gaskell’s BlackRock European Income fund on Scott’s view that ‘the love of America and hatred for Europe is overdone’.

The pair also view Europe as having a more diversified spread of income producing companies than North America.

Lockyer said that Vanbrugh’s fixed interest exposure had been the ‘Achilles heel’ last year, with the lack of gilt exposure proving costly.

This year of owning gilts has not hurt performance as much and he described the fixed income portion of the fund - which accounted for around a third of assets – as more concentrated. The first and third biggest holdings are strategic mandates through Peter Harvey’s Cazenove Strategic Bond and Ariel Bezalel’s Jupiter Strategic Bond at 7.1% and 6% respectively.

The pair recently trimmed their holding in Peter Eerdmans’ Investec Emerging Market Debt fund. Despite their long-term belief in the area, it is an area that has become relatively hot for investment groups and investors alike recently.

Lockyer said: ‘The yields are still attractive relative to many western bond markets but it is not an undiscovered area any more.’

While the pair remain wary overall on high yield, they favour the Baillie Gifford High Yield Bond fund for its relatively cautious approach.

Elsewhere, the fund has around 25% in investment trusts, although this has been reduced down from 28% since the summer after fixed income trusts from Neuberger Berman and New City were sold down.

Betting on private equity rerating

Lockyer said: ‘They were trading at high premiums already and as we were already concerned about high yield we reduced our positions.’

The pair have some 7% of the fund in private equity, including positions in Electra, HgCapital, F&C Private Equity and Graphite Enterprise. Many of these trusts are still trading at 20% discounts, but the pair are confident that sentiment towards the sector is set to improve over the coming months.

Lockyer said: ‘We have six positions in private equity which give investors early stage exposure to companies. People got badly burned in the global financial crisis so have been very slow to return to the sector.

‘We expect it to experience a rapid rise in interest and right now, investors can still get in at attractive discounts.’

Since launch in February 2009 to the end of November the fund has returned 69.4% compared to a 58.9% rise by the FTSE Apcims/Balanced benchmark.

Selection Watchlist Verdict: Phoenix Hawksmoor Vanbrugh

Scott and Lockyer have consistently demonstrated an ability to asset allocate shrewdly in tough conditions, effectively articulating a clear macroeconomic view. They are also one of the few mixed asset funds we look at that takes a keen interest in investment trusts as part of their strategy, exploiting the discounts available in unloved areas. They are currently focusing on the long-term, which caused a bout of underperformance in 2011 but has helped them in 2012. The duo are currently looking at private equity opportunities and positioning for an inflationary environment further out.

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